Market participants and economists have noted that the macro outlook for the US economy is particularly uncertain. There seems to be so many contradicting variables that lead to differing conclusions. On one hand you have strong corporate profits, easy monetary policy, and growth from emerging markets. On the other hand the US has high structural unemployment, egregious levels of government debt, and a housing depression. I believe the US economy faces 3 possible economic scenarios: Economic Stagnation (1-2% GDP growth), Economic Depression (severe economic contraction), and Hyperinflation. You will notice that there is no V-Shape economic recovery with strong growth (4-5%) option. Anyone who has studied economic history will tell you that economic and financial conditions simply do not support this outcome as a realistic possibility. The main reasons for this include de-leveraging, an insolvent banking system, collapse of housing market, record levels of government and private sector debt, and high unemployment. Under these conditions it is impossible to have a strong and healthy economy. Lets review 3 possible economic scenarios:
1. Economic Stagflation (probability 60%)--Under this scenario the US economy is trapped in a prolonged period of anemic economic growth, high unemployment, elevated commodity prices. While technically not a recession it will feel like one to the majority of the population. This situation seems to be the most likely scenario as the Federal Reserve continually prints money to prevent (much needed) asset price deflation. While money printing can support asset prices it cannot create strong economic growth because of the economy's structural problems. All the Fed's money printing does is prop up commodity prices (oil, gold, copper). Despite high commodity prices, inflation stays relatively tame at around 3-7% (using real inflation numbers not the CPI) as businesses find it difficult to pass on higher input costs due to weak end user demand. Another factor which keeps inflation tame is low money velocity within the banking system as insolvent institutions withhold credit from the economy. The banks desperately try to repair their balance sheets by earning their way out their problems. This makes the idea of extending credit to the economy risky and buying government treasuries a desirable action. This contraction of credit puts enormous amounts of stress on small business which account for 60% of new job creation in the US. To cope with the increasing numbers of long-term unemployed, the government expands welfare benefits and implements numerous stimulus packages. Under this scenario, stocks perform poorly in real (inflation adjusted) terms in a situation similar to what occurred during the 1970's. From 1968-1982 stocks lost approx. 80% of their value in inflation adjusted terms, but remained flat in nominal terms. In my opinion this is the likely outcome and the most favorable.

2. Economic Depression (probability 20%)--Under this scenario, the Federal Reserve's money printing is not enough to counter deflationary trends such as falling home prices, reduced demand for credit, and an insolvent banking system. The most likely catalyst for this scenario is a wave of sovereign defaults (e.g. Eastern Europe or the PIGS) which leads to a complete collapse of the worldwide banking system and OTC derivatives market. The Federal Reserve could print as much money as they want but it would not be enough to counter the collapse of the $250 trillion+ derivatives market. All companies who use derivatives to hedge or protect themselves would also fail as their counter parties renege on their obligations. With a complete collapse of the world banking system, credit contracts as an alarming rate causing businesses who rely on short term funding to fail, leading to millions of job losses. The US government is unable to support so many unemployed workers because the US government itself is unable to borrow the trillions of dollars necessary to fund stimulus programs. People starve in the streets by the hundreds of thousands, millions are permanently homeless, and the social fabric of society disintegrates as everyone struggles to survive. Perhaps the worst aspect of this scenario is that it would take a minimum of 10-20 years for the country to recover. The stock market would likely fall 90% or more as thousands of companies file for bankruptcy and liquidate assets. Just as occurred during the great depression, stock prices of companies would fall below cash levels, a situation many economists thought impossible.

3. Hyperinflation (probability 20%)---Under this scenario, the Federal Reserve's money printing operation (QE 1,2,3,4,5) works and successfully re-inflates the economy but leads to hyperinflation (defined as 50%+ inflation per year). The cause of the hyperinflation is not a healthy and growing economy. It is instead a complete loss of confidence in the US dollar not only by US citizens, but also by foreign countries who all rush to dump their dollar holdings. This moment comes as a complete surprise to the idiots/criminals at the Federal Reserve who confidently predicted months earlier that inflation was impossible as long as the output gap remained large and unemployment high. The government naturally blames "evil speculators" for pushing up prices and drafts legislation banning hoarding. Meanwhile the velocity of money skyrockets as everyone tries to unload their useless dollars for real assets as fast as they can. The government benefits from hyperinflation along with debtors as the real value of their debts drops to zero. The only potential problem for the government is that they are no longer able to borrow in dollars, but must instead issue Yuan denominated debt. The middle class is officially destroyed once and for all. The rich stay rich because they own real assets such as property, infrastructure, and businesses. Hyperinflation it must be remembered is not a destruction of wealth as you often read in books. It is instead a transfer of wealth from the poor and middle class to the rich. Under this bleak scenario the stock market will perform well in nominal terms but terrible in real inflation adjusted terms. During the Wiemar hyperinflation stocks lost 98% of their purchasing power, yet stocks did outperform cash which lost 99.999999%. It was a Pyrrhic victory.

Well there you have it, the three most likely economic outcomes for the US economy. You notice that in each of the 3 scenarios the stock market looses value in real terms. I think the best hope for the economy is scenario 1 ,which is not pleasant but represents the least bad outcome. Some may think that I am simply a pessimist but I would counter that I am just being realistic. You cannot sugarcoat all of the problems facing the US economy. They are real and require immediate attention. But our politicians are unwilling to address them until it is too late.

Here is a list of EU banks with the highest amount of exposure to Irish debt default . The data is based on the EU stress test results . ...

Words of Wisdom from Leonardo da Vinci

1. I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.

2.Simplicity is the ultimate sophistication.

3.Life well spent is long.

4.Life is pretty simple: You do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is the doing something else.

5. Marriage is like putting your hand into a bag of snakes in the hope of pulling out an eel.

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